Two-Way Traffic

Capital flows between the Gulf states and the UK are reaching epic proportions

KHALEEJ blog: Our bloggers dive for pearls of wisdom on the Arabian Peninsula. ‘Khaleej’ follows the economic, political and social trends in this fast-developing promontory of the Arab World.

Prince Andrew, the duke of York, looks on as (front L-R) Dr Sultan Ahmed Al-Jaber, minister of state and Masdar City CEO and the UK Green Investment Bank plc CEO Shaun Kingsbury sign a Memorandum of Understanding to explore project investment opportunities in the UK’s clean energy sector. At the back are (back L-R) Sheikh Hamed Bin Zayed Al-Nahyan, chairman of the Abu Dhabi Crown Prince’s Court, and Greg Barker, the UK energy and climate change minister, at Buckingham Palace in London, England on May 1, 2013. (Lewis Whyld—WPA Pool/Getty Images)

In response to the events of 9/11, the American government imposed harsh restrictions on the movement of money, froze many accounts held in American banks and introduced new border controls. In response, the Gulf states began to move their investments to European countries—particularly the UK. The move came in part because Gulf investors saw the UK as having a safer and more favorable financial climate with bigger potential returns, as well as being more welcoming of their investments.

Gulf investment in Britain reached GBP 100 billion (USD 160 billion at GBP 1=USD 1.6) in 2012, of which GBP 60 billion came from Saudi Arabia, GBP 20 billion from Qatar, and GBP 20 billion from the UAE, Bahrain, Kuwait and Oman. This investment—and above all the Saudi investment—concentrated on real estate, capital markets and banks.

Dr Suzanne Smith, a UK-based professor of international economics, said: “The money and assets in Gulf funds amounts to almost USD 5 trillion,” adding, “It is more beneficial for Gulf residents to invest this money, which is originally from crude oil, in manufacturing and service projects in Europe and the UK, rather than putting it in banks with slim returns or investing it on stock and capital markets and exposing it to great risks.”

London mayor Boris Johnson recently visited the Gulf region at the head of a delegation of British businessmen, aiming to encourage people to in invest in London and the surrounding area. He called for investment in a new airport that is planned to be built near the capital, which will cost GBP 80 billion and is expected to welcome 180 million passengers a year.

During the mayor’s visit to Doha, he referred to figures showing that direct Qatari investment in the UK had reached GBP 20 billion in 2012, mostly in real estate and investment funds and some in service industries. It is worth mentioning that Qatar asked to invest privately in the London Underground and British electricity plants, and Qatari construction company Al-Diar helped to build the Olympic Park in East London.

Despite this, companies have faced difficulties during their projects. Gulf companies faced poorly-understood regulatory hurdles when trying to exercise ownership rights in shares the held in UK companies such as Sainsbury’s and Barclays, as well as when entering deals to buy properties in central London. For example, the Abu Dhabi Investment Authority, which is the largest sovereign wealth fund in the world, faced similar obstacles when trying to buy shares in London’s Gatwick Airport.

In recent years, the UK has been eager to strengthen its commercial and economic ties with the Gulf states, as well as to attract as much investment as possible to the country. The main goal of this investment is to help the UK recover from the economic crisis it has been suffering from since 2008. It is also hoped that such activity will help solve the problem of unemployment, which fell slightly to just below 8 percent in the first six months of 2013. There has also been an uptick in trade missions to the Gulf, made up of businessmen and representatives of firms with a view to marketing and selling the goods and services of British industry.

As far as overall trade between the United Kingdom and the Gulf is concerned, imports and exports reached GBP 23 billion in 2012. Of this, approximately GBP 9.25 billion was imports to the UK from the Gulf—mainly oil and oil products. The UK’s exports to the Gulf totaled GBP 13.75 billion (USD 21.11 billion).

Rather than investment from the Gulf and shared commercial ventures, the primary concern of the British government and business community is getting the lion’s share of large infrastructure and growth projects in the Gulf, whose value will be USD 200 billion over the next ten years. Of that amount, USD 90 billion will be invested in projects specifically related to the 2022 FIFA World Cup in Qatar. Britain is trying to find a way out its current financial crisis, particularly after British exports to Europe fell in 2012 and are expected to fall a further 0.6 percent in 2013—and over 50 percent of Britain’s exports currently go to the Eurozone.

Saudi Arabia deserves special attention due to its commercial relations with and investments in Britain and the importance of its ongoing support. Britain is one of the largest investors in Saudi Arabia, with 349 British companies operating there, 20 percent in manufacturing and 80 percent in services. British companies operating in Saudi Arabia continue to expand as a result of the stability of the business climate. Saudi Arabia is ranked eighth in the world and first in the Gulf for attracting foreign investment.

The first real estate investment fund to be jointly managed between a Saudi financial company, Sidra, and a British bank, Gatehouse, was recently established in London, with a value of GBP 100 million. It aims to offer a more secure investment vehicle to Gulf investors in general, and Saudi investors in particular.

Emirati investment in Britain is worth more than GBP 5 billion. It includes the projects of the Abu Dhabi National Energy Company in the North Sea and those of Dubai Ports International (DPI). DPI has invested in several projects in the UK, including the Port of London, which aims to bring large ships back to the capital with investments worth almost GBP 1.5 billion. The Port of London project is also the biggest currently underway in Britain, providing job opportunities for 35,000 workers. Notable investment in the UK from the UAE also includes DPI’s Southampton Container Terminal, the second-largest of its kind in Britain, the investment from renewable energy company Masdar to construct the largest off-shore wind farm in the world, and sporting investments in the Olympic Village and London’s ExCel Centre. Dubai has also invested almost GBP 36 million in constructing a cable car across the River Thames.

Equally, there are almost 5,000 British companies operating in the Emirates and 100,000 Britons living there, in addition to one million British tourists visiting the Emirates every year.

It has been observed that British behavior has changed in recent years, from calling on the Gulf to buy British goods to competing to attract Gulf investments to Britain. At the same time, the British have their eyes fixed on competing to win as many contracts in the Gulf as possible. The UK government has been very welcoming of sovereign investment funds from the Gulf despite the deteriorating economic situation and the program of austerity the government is pursuing under Conservative prime minister David Cameron.

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[…] importance of the economic dimension between the UK and the region can not be overstated. Gulf investments in the island country, when taken as a whole, have reached monumental proportions topping £100bn […]